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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-63117
PROSPECTUS
BEA SYSTEMS, INC.
$250,000,000 OF 4% CONVERTIBLE SUBORDINATED NOTES DUE JUNE 15, 2005
9,467,450 SHARES OF COMMON STOCK
This Prospectus relates to the offering for resale by certain selling
securityholders set forth herein (the "Selling Securityholders") of up to an
aggregate of $250,000,000 of 4% Convertible Subordinated Notes due June 15,
2005 (the "Notes") of BEA Systems, Inc., a Delaware corporation ("BEA" or the
"Company") and 9,467,450 shares of Common Stock, par value $.001 per share
(the "Shares") that are issuable upon conversion of the Notes at the
conversion rate of 37.8698 shares per $1,000 principal amount of Notes,
subject to adjustment in certain events. The Notes offered hereby were
originally offered by the Company in a private placement.
The Notes will be convertible at the option of the holder into shares of
Common Stock of the Company at any time on or after September 6, 1998 and
prior to the close of business on the maturity date, unless previously
redeemed or repurchased, at a conversion rate of 37.8698 shares per $1,000
principal amount of Notes (equivalent to an approximate conversion price of
$26.41 per share), subject to adjustment in certain events. On November 23,
1998, the last reported bid price of the Company's Common Stock, which is
quoted on the Nasdaq National Market under the symbol "BEAS", was $13.4375 per
share.
Interest on the Notes is payable on June 15 and December 15 of each year,
commencing on December 15, 1998. The Notes will not be subject to redemption
prior to June 20, 2001, and will be redeemable on and after such date at the
option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice to each Holder, at the redemption prices set forth
herein, plus accrued interest, if any, to the redemption date; provided,
however, that the Notes will not be redeemable during the period beginning on
June 20, 2001 and ending on June 17, 2003 unless the last reported bid price
for the Common Stock is at least 140% of the conversion price for at least 20
trading days within a period of 30 consecutive trading days ending within five
trading days of the call for redemption. The Notes are not entitled to any
sinking fund. The Notes will mature on June 15, 2005.
In the event of a Change in Control (as defined herein), each holder of
Notes may require the Company to repurchase its Notes, in whole or in part,
for cash or, at the Company's option, Common Stock (valued at 95% of the
average closing bid prices for the five trading days immediately preceding and
including the third trading day prior to the repurchase date) at a repurchase
price of 100% of the principal amount of Notes to be repurchased, plus accrued
interest to the repurchase date.
The Notes are unsecured obligations of the Company, subordinated in right of
payment to all existing and future Senior Indebtedness (as defined herein) of
the Company and effectively subordinated in right of payment to all
indebtedness and other liabilities of the Company's subsidiaries. As of
September 30, 1998, the aggregate amount of outstanding Senior Indebtedness of
the Company was approximately $0.8 million and the Company's subsidiaries had
approximately $30.0 million of indebtedness and other liabilities outstanding
(excluding liabilities of a type not required to be reflected in a balance
sheet in accordance with generally accepted accounting principles and
intercompany liabilities) to which the Notes would have been effectively
subordinated. The Indenture will not restrict the Company or its subsidiaries
from incurring additional Senior Indebtedness or other indebtedness. See
"Description of Notes--Subordination."
THE SECURITIES OFFERED HEREBY INVOLVE CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Selling Securityholders from time to time may offer and sell the Notes
and Shares held by them directly or through agents or broker-dealers on terms
to be determined at the time of sale. To the extent required, the names of any
agent or broker-dealer and applicable commissions or discounts and any other
required information with respect to any particular offer will be set forth in
an accompanying Prospectus Supplement. See "Plan of Distribution."
The Company will not receive any of the proceeds from the sale of Shares by
the Selling Securityholders but has agreed to bear certain expenses of
registration of the Shares under federal and state securities laws.
The Selling Securityholders and any agents or broker-dealers that
participate with the Selling Securityholders in the distribution of Shares may
be deemed to be "underwriters" within the meaning of the Securities Act of
1933, as amended (the "Securities Act"), and any commissions received by them
and any profit on the resale of the Shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
The date of this Prospectus is November 23, 1998
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TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Available Information...................................................... 3
Incorporation of Certain Documents by Reference............................ 3
The Company................................................................ 5
Recent Events.............................................................. 6
Use of Proceeds............................................................ 7
Ratio of Earnings to Fixed Charges......................................... 7
Risk Factors............................................................... 8
Selling Securityholders.................................................... 16
Description of Notes....................................................... 21
Plan of Distribution....................................................... 32
Experts.................................................................... 33
Legal Matters.............................................................. 33
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS
IN CONNECTION WITH THE OFFER DESCRIBED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SECURITYHOLDERS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE UNDER THIS PROSPECTUS SHALL
UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR SINCE THE DATE OF ANY
DOCUMENTS INCORPORATED HEREIN BY REFERENCE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, OR AN OFFER OR
SOLICITATION IN ANY STATE TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER IN SUCH STATE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith the Company files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information filed can be inspected and copied at
the Commission's Public Reference Section, 450 Fifth Street, N.W., Washington,
D.C., 20549, and at the following regional offices of the Commission: Seven
World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can
be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a web site (http://www.sec.gov) containing reports, proxy and
information statements and other information of registrants, including the
Company, that file electronically with the Commission. In addition, the Common
Stock is listed on the Nasdaq National Market and similar information
concerning the Company can be inspected and copied at the offices of the
National Association of Securities Dealers, Inc., 9513 Key West Avenue,
Rockville, Maryland 20850.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") (of which this Prospectus is a part) under
the Securities Act of 1933, as amended (the "Securities Act"), with respect to
the Shares. This Prospectus does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other documents are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules thereto. For further information
regarding the Company and the Shares, reference is hereby made to the
Registration Statement and such exhibits and schedules which may be obtained
from the Commission at its principal office in Washington, D.C. upon payment
of the fees prescribed by the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below have been filed by the Company under the Exchange
Act with the Commission and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-KSB for the year ended January 31,
1998;
b. The Company's Quarterly Reports on Form 10-Q for the quarters ended April
30, 1998, as amended September 10, 1998, and July 31, 1998;
c. The Company's Current Reports on Form 8-K dated as of June 30, 1998,
September 10, 1998 and October 15, 1998, as amended October 29, 1998; and
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d. The description of the Registrant's Common Stock contained in the
Registrant's Registration Statement on Form 8-A (File No. 000-22369).
Each document filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the
date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein (or in the applicable Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or
superseded, to constitute a part of this Prospectus.
Copies of all documents which are incorporated herein by reference (not
including the exhibits to such information, unless such exhibits are
specifically incorporated by reference in such information) will be provided
without charge to each person, including any beneficial owner, to whom this
Prospectus is delivered upon written or oral request. Requests should be
directed to Kevin A. Faulkner, Senior Director--Investor Relations, 2315 North
First Street, San Jose, California 95131, telephone number: (408) 570-8000.
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THE COMPANY
BEA Systems, Inc. ("BEA" or the "Company") is a leading provider of cross-
platform middleware solutions for enterprise applications. BEA's products and
services enable mission-critical applications to work seamlessly in
distributed computing, Internet, and legacy environments. BEA provides
transactional, messaging, and distributed object-based software for developing
and deploying these enterprise applications. In addition, BEA provides
complete enterprise middleware solutions through its partner network, and a
full range of services including consulting, training and support. The
flagship of the BEA enterprise middleware solution is BEA TUXEDO, a software
platform that manages transactions and communications for enterprise-wide
applications, enabling organizations to realize the benefits offered by
distributed computing environments while preserving the traditional advantages
of mainframe-based systems. BEA products provide a middleware software
infrastructure that supports thousands of simultaneous users distributed
worldwide.
BEA's products are marketed and sold by the Company's direct sales force
through a network of 51 offices in 24 countries worldwide and also indirectly
by its distribution partners. BEA's products have been adopted by customers in
a wide variety of industries, including telecommunications, banking and
finance, manufacturing, retail, technology and transportation. The total
number of customers using the Company's products is approximately 2,000
worldwide. These customers include: The AT&T Corp., Bell Communications
Research, Inc., The Boeing Company, Deutsche Telekom, Federal Express Corp.,
Fidelity Investments, The Gap, Inc., McKesson Corp., Motorola, Inc., Nippon
Telephone & Telegraph, Norwest Corporation, United Airlines, Inc., U.K.
Employment Services, Union Pacific Railroad and Walgreen Co. In addition, the
Company partners with independent software vendors ("ISVs") such as
PeopleSoft, Inc. and Clarify, Inc. and computer hardware manufacturers such as
Hewlett-Packard, IBM and Unisys to sell BEA products to enterprise customers.
Over the past decade, the information systems of many organizations have
been evolving from traditional mainframe systems to distributed computing
environments. This evolution has been driven by the benefits offered by
distributed computing, including lower incremental technology costs, faster
application development and deployment, increased flexibility and improved
access to business information. However, the inherent technical and business
limitations of distributed computing have generally precluded its use for
complex, large-scale, mission-critical applications, such as airline
reservations, credit card processing and customer billing and support systems,
that enable and support fundamental business processes. These shortcomings
include the limited scalability, reliability and interoperability of
distributed computing environments. In addition, it has been difficult to
integrate distributed computing technologies with existing mission-critical
applications, limiting organizations' ability to leverage their substantial
investments in legacy systems and existing personnel and skills.
BEA's products and services enable companies to overcome the limitations of
distributed computing for mission-critical applications. The Company's
enterprise middleware solutions, featuring time-tested and market-proven BEA
TUXEDO technology, provide a middleware platform that addresses the
scalability, manageability, platform independence, interoperability,
integrity, reliability and security requirements of complex, large-scale,
distributed computing in the heterogeneous environments present in most major
organizations. The BEA solution allows companies to leverage their substantial
investments in legacy systems, significantly extending the useful lives of
mainframe and programmer assets while exploiting the benefits offered by
distributed computing. The Company also offers solutions that enable customers
to quickly develop secure, reliable applications on the Internet that
interoperate with new and existing systems.
The Company's objective is to establish its middleware solutions as the
industry standard for developing, deploying and managing distributed mission-
critical applications. To this end, BEA intends to enhance its technological
leadership by adding new functionality to its products; expand its global
distribution facilities to complement its direct sales, services, training and
support capabilities; promote the embedding of BEA products into the product
offerings of ISVs to accelerate the acceptance of BEA products; leverage
strategic partnerships to augment the efforts of its direct sales force; and
provide the software and services necessary to conduct safe, reliable
enterprise transactions over the Internet.
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From its inception, the Company has made a number of strategic acquisitions.
The Company acquired worldwide exclusive rights to TUXEDO from Novell, Inc.
("Novell") in February 1996, acquired Information Management Company ("IMC")
and Independence Technologies, Inc. ("ITI"), two leading distributors of
TUXEDO, in September 1995 and November 1995, respectively, and acquired a
number of other TUXEDO distribution, sales and support organizations between
May 1996 and December 1996. In March 1997, the Company acquired exclusive
rights to MessageQ, ObjectBroker and other related products from Digital
Equipment Corporation ("Digital"). See Note 4 of Notes to Consolidated
Financial Statements in the Company's Annual Report on Form 10-KSB. In the
quarter ended January 31, 1998, the Company acquired a business unit of Nocom
Nordic Communications AB ("Nocom"), and in the quarter ended April 30, 1998,
the Company acquired a business unit of Penta Systems Technology, Inc.
("Penta"). In April 1998, the Company acquired the Leader Group, Inc. ("Leader
Group"), a Denver-based consulting services firm. Most recently, on June 16,
1998, the Company purchased the TOP END enterprise middleware technology and
product family ("TOP END") from NCR Corporation ("NCR") and, on July 20, 1998
acquired Entersoft a New Jersey based consulting services firm. See "Risk
Factors--Past and Future Acquisitions; Risks Associated with TOP END
Acquisition."
The Company was incorporated in Delaware in January 1995 under the name BEA
Enterprises, Inc. and changed its name to BEA Systems, Inc. in September 1995.
References herein to "BEA" or the "Company" refer to BEA Systems, Inc., its
subsidiaries and predecessor entities acquired in previous acquisitions. The
Company's headquarters are located at 2315 North First Street, San Jose,
California 95131, and its telephone number is (408) 570-8000.
RECENT EVENTS
ACQUISITION OF WEBLOGIC, INC.
Pursuant the terms of the Agreement and Plan of Reorganization dated as of
September 24, 1998 between and among the Company, WebLogic, Inc. ("WebLogic")
and Charlotte Acquisition Corp. ("Charlotte") (the "Merger Agreement"), the
Company completed the merger of Charlotte, a wholly-owned subsidiary of the
Company, with and into WebLogic (the "Merger") on September 30, 1998. The
transaction was accounted for using the pooling of interests method.
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USE OF PROCEEDS
All of the Notes and Common Stock offered hereby (the "Securities") are
offered by the Selling Securityholders. The Company will not receive any of
the proceeds from the sale of Securities by the Selling Securityholders, but
has agreed to bear certain expenses of registration of the Securities offered
hereby under federal and state securities laws.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to fixed charges for each of the periods
indicated is as follows (in thousands):
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
SIX MONTHS
ENDED FISCAL YEARS ENDED JANUARY
JULY 31, 31,
---------- ----------------------------
1998 1998 1997 1996
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Loss before income taxes.............. $(39,724) $(20,068) $(87,034) $(17,680)
Add fixed charges..................... 5,162 8,531 8,238 193
-------- -------- -------- --------
Earnings (as defined)................. $(34,562) $(11,537) $(78,796) $(17,487)
======== ======== ======== ========
Fixed charges:
Interest expense.................... 3,785 6,054 6,727 89
Portion of rent expense representa-
tive of interest................... 1,377 2,477 1,511 104
-------- -------- -------- --------
Total fixed charges............... $ 5,162 $ 8,531 $ 8,238 $ 193
======== ======== ======== ========
Ratio of earnings to fixed charges.... * * * *
======== ======== ======== ========
</TABLE>
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* Earnings (as defined) were insufficient to cover fixed charges by $39,724,
$20,068, $87,034 and $17,680 for the six month period ended July 31, 1998
and the fiscal years ended January 31, 1998, 1997 and 1996, respectively.
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RISK FACTORS
Investors should carefully consider the following risk factors in evaluating
an investment in the Common Stock offered hereby. This Prospectus includes
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. All statements in this
prospectus other than statements of historical fact are "forward-looking
statements" for purposes of these provisions, including any projections of
earnings, revenues or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of
the foregoing. In some cases, forward-looking statements contain words an be
identified by the use of terminology such as "may," "will," "expects,"
"plans," "anticipates," "estimates," "potential," or "continue," or the
negative thereof or other comparable terminology. BEA's actual results could
differ materially from these projected or assumed in these forward-looking
statements because of risks and uncertainties, including risks and
uncertainties described in the risk factors below and elsewhere in this
Prospectus. We assume no obligation to update any such forward-looking
statement or reason why actual results might differ.
LIMITED OPERATING HISTORY; INTEGRATION OF ACQUISITIONS; NO ASSURANCE OF
PROFITABILITY
BEA was incorporated in January 1995 and therefore has a limited operating
history. We have generated revenues to date primarily from sales of BEA
TUXEDO, a product to which we acquired worldwide rights in February 1996, and
from fees for related services. We have also acquired a number of businesses,
technologies and products, most recently WebLogic, Inc. Our limited operating
history and the difficulties of integrating a number of separate and
independent business operations subject our business to numerous risks. At
July 31, 1998, we had an accumulated deficit of approximately $173 million. In
addition, in connection with certain acquisitions completed prior to July 31,
1998, we recorded approximately $234.2 million as intangible assets,
approximately $158.7 million of which has been amortized and approximately
$75.5 million of which we expect to amortize in future periods through our
fiscal year ending January 31, 2004. We expect to expense to cost of revenues
and general and administrative expenses $26.0 million of such intangible
assets in the fiscal year ending January 31, 1999 and $30.8 million in the
fiscal year ended January 31, 2000. If we acquire additional businesses,
products and technologies in the future, we may report additional, potentially
significant, expenses related thereto. If future events cause the impairment
of any capitalized intangible assets, we may have to amortize expenses sooner
than we expect. For the foregoing reasons, there can be no assurance that we
will be profitable in any future period and recent operating results should
not be considered indicative of future financial performance.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
We expect to experience significant fluctuations in our future quarterly
operating results as a result of many factors, including:
. the size and timing of customer orders, introduction or enhancement of
our products or our competitors' products
. general economic conditions which can affect our customers' capital
investment levels and the length of our sales cycle
. the impact and duration of deteriorating economic and political
conditions in Asia and related declines in Asian currency values
. market acceptance of middleware products
. the lengthy sales cycle for our products
. technological changes in computer systems and environments
. structure and timing of acquisitions of businesses, products and
technologies, including the acquisition of the TOP END enterprise
middleware technology and product family from NCR and the WebLogic
application server technology
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. our ability to develop, introduce and market new products on a timely
basis
. changes in our or our competitors' pricing policies, customer order
deferrals in anticipation of future new products and product
enhancements
. our success in expanding our sales and marketing programs
. the mix of our products and services sold, mix of distribution channels
. our ability to meet the service requirements of our customers
. costs associated with acquisitions, including the acquisition of the TOP
END enterprise middleware technology and product family from NCR, and
the WebLogic acquisition
. the terms and timing of financing activities
. loss of key personnel and fluctuations in other foreign currency
exchange rates
. interpretations of the recently introduced statement of position on
software revenue recognition.
As a result of all of these factors, we believe that quarterly revenues and
operating results are difficult to forecast and period-to-period comparisons
of our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
Our revenues are derived from large orders as customers deploy our products
throughout their organizations. Increases in the revenue size of individual
license transactions also increase the risk of fluctuation in future quarterly
results. If we cannot generate large customer orders, or customers delay or
cancel such orders in a particular quarter, it will have a material adverse
effect on our revenues and, more significantly on a percentage basis, our net
income or loss in that quarter. Moreover, we typically receive and fulfill a
majority of our orders within the quarter, with a substantial portion
occurring in the last month of a fiscal quarter. As a result, we may not learn
of revenue shortfalls until late in a fiscal quarter. Additionally, our
operating expenses are based in part on our expectations for future revenue
and are relatively fixed in the short term. Any revenue shortfall below our
expectations could have an immediate and significant adverse effect on our
results of operations.
As is common in the software industry, we believe that a variety of factors
cause our fourth quarter orders to be favorably impacted, including year-end
capital purchases by larger corporate customers and sales incentive programs.
This increase typically results in first quarter customer orders being lower
than orders received in the immediately preceding fourth quarter. We
anticipate that this seasonal impact is likely to increase as we continue to
focus on large corporate accounts.
Similarly, shortfalls in our revenues and earnings from levels expected by
securities analysts could have an immediate and significant adverse effect on
the trading price of our Common Stock. Moreover, our stock price is subject to
the volatility generally associated with software and technology stocks and
may also be affected by broader market trends unrelated to our performance may
also affect our stock price.
RISKS ASSOCIATED WITH PAST AND FUTURE ACQUISITIONS
From our inception in January 1995, we have made a number of strategic
acquisitions. Integration of acquired companies, divisions and products
involves the assimilation of potentially conflicting operations and products,
which divert the attention of our management team and may have a material
adverse effect on our operating results in future quarters. We acquired
WebLogic, Inc. in September 1998 (discussed below), Leader Group and Penta in
the quarter ended April 30, 1998, the Entersoft Systems Corporation in July
1998, and TOP END (discussed below) in June 1998. We intend to make additional
acquisitions in the future, although there can be no assurance that suitable
companies, divisions or products will be available for acquisition. Such
acquisitions entail numerous risks, including the risk we will not
successfully assimilate the acquired operations and products, and retain key
employees of the acquired operations. There are also risks relating to the
diversion of our management's attention and difficulties and uncertainties in
our ability to maintain the key business relationships the acquired entities
have established. In addition, if we undertake future acquisitions, we may
issue
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dilutive securities, assume or incur additional debt obligations and large
one-time expenses, and acquire intangible assets that would result in
significant future amortization expense. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
The recently completed WebLogic merger is subject to a number of risks that
could adversely affect our ability to achieve the anticipated benefits of this
transaction. These risks include the risk that we will not be able to
successfully integrate our products and business with WebLogic's and risks
relating to the diversion of the attention of the Company's management team,
particularly Alfred Chung, the Company's Chief Technical Officer, who will
oversee WebLogic's operations. There are also risks relating to competition
from other web application server providers, particularly those recently
acquired by companies with significantly greater resources than ours. The need
to focus our management's attention on establishing relationships with, and
procedures for communicating with, WebLogic employees may reduce our ability
to successfully pursue other opportunities for a period of time. Any departure
of key WebLogic employees or significant numbers of other WebLogic employees
could have a material adverse effect on our operations. We may face
difficulties in retaining WebLogic customers.
The recently-completed TOP END acquisition is also subject to a number of
risks that could adversely affect our ability to achieve benefits we
anticipate from the TOP END acquisition. The location of the TOP END
operations and personnel in San Diego, California, where we did not previously
have any material operations exacerbates the risks of this acquisition. The
need to focus management's attention on establishing relationships with, and
procedures for communicating with, TOP END employees may reduce our ability to
successfully pursue other opportunities for a period of time. Any departure of
key TOP END employees or significant numbers of other TOP END employees could
have a material adverse effect on our operations. We may face difficulties in
retaining TOP END customers, and customers' uncertainties as to our plans and
abilities to support both the TOP END products and BEA TUXEDO could adversely
affect our ability to retain these customers, which could have a material
adverse effect on our operations. We wrote off $38.3 million in our quarter
ended July 31, 1998 for acquired in-process research and development related
to the TOP END acquisition, and we will incur substantial ongoing amortization
expenses, which will have a negative impact on our future operating results.
See "Recent Events."
PRODUCT CONCENTRATION
We currently derive the majority of our license and service revenues from
BEA TUXEDO and from related products and services. We expect these products
and services to continue to account for the majority of our revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for BEA TUXEDO, such as competition, product performance or
technological change, could have a material adverse effect on our business and
consolidated results of operations and financial condition.
LENGTHY SALES CYCLE
Our customers typically use our products to integrate large, sophisticated
applications that are critical to their business, and their purchases are
often part of their implementation of a distributed computing environment.
Customers evaluating our software products face complex decisions regarding
alternative approaches to the integration of enterprise applications,
competitive product offerings, rapidly changing software technologies and
limited internal resources due to other information systems requirements. For
these and other reasons, the sales cycle for our products is lengthy and is
subject to delays or cancellation over which we have little or no control. To
the extent the revenue size of our license transactions increases, we expect
customer evaluations and procurement processes to lengthen and thus extend the
overall sales cycle. We believe general economic conditions which impact
customers' capital investment decisions also affect our sales cycles. Any
significant change in our sales cycle could have a material adverse effect on
our business, results of operations and financial condition.
Although we use a standard license agreement which meets the revenue
recognition criteria under current generally accepted accounting principles,
we must often negotiate and revise terms and conditions of this
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standard agreement, particularly in larger sales transactions. Negotiation of
mutually acceptable language can extend the sales cycle and in certain
situations, may require us to defer recognition of revenue on the sale. In
addition, while we do not expect the recently issued Statement of Position
(SOP) 97-2, Software Revenue Recognition (as amended by SOP 98-4), to have a
material impact on our revenues and earnings, detailed implementation guidance
of these standards has not yet been issued. Once issued, such guidance could
require us to make unanticipated changes in our current revenue recognition
practices and such changes could have an adverse impact on revenues and
earnings.
COMPETITION
The market for middleware software and related services is highly
competitive. Our competitors are diverse and offer a variety of solutions
directed at various segments of the middleware software marketplace. These
competitors include system and database vendors such as IBM and database
vendors such as Oracle, which offer their own middleware functionality for use
with their proprietary systems. Microsoft has released a product that includes
certain middleware functionality and has demonstrated and announced that it
intends to include this functionality in future versions of its Windows NT
operating system. In addition, there are companies offering and developing
middleware and integration software products and related services that
directly compete with products we offer. Further, software development tool
vendors typically emphasize the broad versatility of their toolsets and, in
some cases, offer complementary middleware software that supports these tools
and performs messaging and other basic middleware functions. Last, internal
development groups within prospective customers' organizations may develop
software and hardware systems that may substitute for those we offer. A number
of our competitors and potential competitors have longer operating histories,
significantly greater financial, technical, marketing and other resources,
greater name recognition and a larger installed base of customers than us.
Our principal competitors currently include hardware vendors who bundle
their own middleware software products with their computer systems and
database vendors that advocate client/server networks driven by the database
server. IBM is the primary hardware vendor who offers a line of middleware and
database solutions for its customers. The bundling of middleware functionality
in IBM proprietary hardware and database systems requires us to compete with
IBM in its installed base, where IBM has certain inherent advantages due to
its significantly greater financial, technical, marketing and other resources,
greater name recognition and the integration of its enterprise middleware
functionality with its proprietary hardware and database systems. We need to
differentiate our products based on functionality, interoperability with non-
IBM systems, performance and reliability and establish our products as more
effective solutions to customers' needs. Oracle is the primary relational
database vendor offering products that are intended to serve as alternatives
to our enterprise middleware solutions.
Microsoft has demonstrated certain middleware functionality and announced
that it intends to include this functionality in future versions of its
Windows NT operating system. Microsoft has also introduced a product that
includes certain middleware functionality. The bundling of middleware
functionality in Windows NT will require us to compete with Microsoft in the
Windows NT marketplace, where Microsoft will have certain inherent advantages
due to its significantly greater financial, technical, marketing and other
resources, greater name recognition, its substantial installed base and the
integration of its middleware functionality with Windows NT. If Microsoft
successfully incorporates middleware software products into Windows NT or
separately offers middleware applications, we will need to differentiate our
products based on functionality, interoperability with non-Microsoft
platforms, performance and reliability and establish our products as more
effective solutions to customers' needs. There can be no assurance that we
will be able to successfully differentiate our products from those offered by
Microsoft, or that Microsoft's entry into the middleware market will not
materially adversely affect our business, operating results and financial
condition.
In addition, current and potential competitors may make strategic
acquisitions or establish cooperative relationships among themselves or with
third parties, thereby increasing the ability of their products to address the
needs of our current and prospective customers. Accordingly, it is possible
that new competitors or alliances
11
<PAGE>
among current and new competitors may emerge and rapidly gain significant
market share. Such competition could materially adversely affect our ability
to sell additional software licenses and maintenance, consulting and support
services on terms favorable to us. Further, competitive pressures could
require us to reduce the price of our products and related services, which
could materially adversely affect our business, operating results and
financial condition. There can be no assurance that we will be able to compete
successfully against current and future competitors and the failure to do so
would have a material adverse effect upon our business, operating results and
financial condition.
INTERNATIONAL OPERATIONS
International revenues accounted for 46 percent and 45 percent of our
consolidated revenues for the six months ended July 31, 1998 and 1997,
respectively. We sell our products and services through a network of branches
and subsidiaries located in 24 countries worldwide. In addition, we also
market through distributors in Europe and the Asia/Pacific region. We believe
that our success depends upon continued expansion of our international
operations. Our international business is subject to a number of risks,
including unexpected changes in regulatory practices and tariffs, greater
difficulties in staffing and managing foreign operations, longer collection
cycles, seasonality, potential changes in tax laws, greater difficulty in
protecting intellectual property and the impact of fluctuating exchange rates
between the US dollar and foreign currencies in markets where BEA does
business, in particular the French franc, the German mark, the British pound,
the Japanese yen, the Australian dollar and the Korean won. General economic
and political conditions in these foreign markets may also impact our
international revenues. Since the late summer of 1997, a number of Pacific Rim
countries have experienced economic, banking and currency difficulties that
have led to economic downturns in those countries. Among other things, the
decline in value of Asian currencies, together with difficulties obtaining
credit, has resulted in a decline in the purchasing power of our Asian
customers, which in turn has resulted in the delay of orders for our products
from certain Asian customers and is likely to result in further delays and,
possibly the cancellation, of such orders. As a result of such delays, our
revenues from Asia for the six months ended July 31, 1998 comprised a lower
percentage of total revenues than we have historically experienced. We
anticipate that weak Asian conditions will continue to adversely impact our
financial results. It is difficult for us to predict the extent of the future
impact of these conditions. There can be no assurances that these factors and
other factors will not have a material adverse effect on our future
international revenues and consequently on our business and consolidated
financial condition and results of operations.
MANAGEMENT OF GROWTH
We are continuing to experience a period of rapid and substantial growth
that has placed, and if such growth continues would continue to place, a
strain on the Company's administrative and operational infrastructure. We have
increased the number of our employees from 120 employees in three offices in
the United States at January 31, 1996 to approximately 1,200 employees in 51
offices in 24 countries at July 31, 1998. Our ability to manage our staff and
growth effectively requires us to continue to improve our operational,
financial and management controls, reporting systems and procedures. In this
regard, we are currently updating our management information systems to
integrate financial and other reporting among our multiple domestic and
foreign offices. In addition, we intend to continue to increase our staff
worldwide and to continue to improve the financial reporting and controls for
our global operations. There can be no assurance that we will be able to
successfully implement improvements to our management information and control
systems in an efficient or timely manner or that, during the course of this
implementation, we will not discover deficiencies in existing systems and
controls. If we are unable to manage growth effectively, our business, results
of operations and financial condition will be materially adversely affected.
DEPENDENCE ON GROWTH OF MARKET FOR MIDDLEWARE
We sell our products and services in the middleware market. This market is
emerging and is characterized by continuing technological developments,
evolving industry standards and changing customer requirements. Our
12
<PAGE>
success is dependent in large part on large customers with substantial legacy
mainframe systems accepting our middleware software products. Our future
financial performance will depend in large part on continued growth in the
number of companies extending their mainframe-based, mission-critical
applications to an enterprise-wide distributed computing environment through
the use of middleware technology. There can be no assurance that the market
for middleware technology and related services will continue to grow. If the
middleware market fails to grow or grows more slowly than we currently
anticipate, or if we experience increased competition in this market, our
business, results of operations and financial condition will be adversely
affected.
DEPENDENCE ON KEY PERSONNEL AND NEED TO HIRE ADDITIONAL PERSONNEL
We believe our future success will depend upon our ability to attract and
retain highly skilled personnel including the Company's founders, Messrs.
William T. Coleman III, Edward W. Scott, Jr., Alfred S. Chuang and key members
of management. Competition for these types of employees is intense, and there
can be no assurance that we will be able to retain our key employees or that
we will be successful in attracting, assimilating and retaining them in the
future. As we seek to expand our global organization, the hiring of qualified
sales, technical and support personnel will be difficult due to the limited
number of qualified professionals. Failure to attract, assimilate and retain
key personnel would have a material adverse effect on our business, results of
operations and financial condition.
EXPANDING DISTRIBUTION CHANNELS AND RELIANCE ON THIRD PARTIES
To date, we have sold our products principally through our direct sales
force, as well as through indirect sales channels, such as ISVs, hardware
OEMs, systems integrators, independent consultants and distributors. Our
ability to achieve significant revenue growth in the future will depend in
large part on our success in expanding our direct sales force and in further
establishing and maintaining relationships with distributors, ISVs and OEMs.
In particular, a significant part of our strategy is to embed our technology
in products our ISV customers offer. We intend to seek distribution
arrangements with other ISVs to embed our middleware technology in their
products and expect that these arrangements will account for a significant
portion of our revenues in future periods. There can be no assurance that we
will be able to successfully expand our direct sales force or other
distribution channels, secure license agreements with additional ISVs on
commercially reasonable terms or at all, or otherwise further develop our
relationships with distributors and ISVs. There also can be no assurance that
any such expansion or additional license agreements would increase our
revenues. Although we believe that our investments in the expansion of our
direct sales force and in the establishment of other distribution channels
through third parties ultimately will improve our operating results, to the
extent that such investments are made and revenues do not correspondingly
increase, our business, results of operations and financial condition will be
materially and adversely affected.
We rely on informal relationships with a number of consulting and systems
integration firms to enhance our sales, support, service and marketing
efforts, particularly with respect to implementation and support of our
products as well as lead generation and assistance in the sale process. We
will need to expand our relationships with third parties in order to support
license revenue growth. Many such firms have similar, and often more
established, relationships with our principal competitors. There can be no
assurance that these and other third parties will provide the level and
quality of service required to meet the needs of our customers, that we will
be able to maintain an effective, long term relationship with these third
parties, or that these third parties will continue to meet the needs of our
customers.
RAPID TECHNOLOGY CHANGE; DEPENDENCE ON NEW PRODUCTS AND PRODUCT ENHANCEMENTS
The market for our products is highly fragmented, competitive with
alternative computing architectures and characterized by continuing
technological development, evolving industry standards and changing customer
requirements. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable.
13
<PAGE>
As a result, our success depends upon our ability to enhance existing
products, respond to changing customer requirements and develop and introduce
in a timely manner new products that keep pace with technological developments
and emerging industry standards. There can be no assurance that our products
will adequately address the changing needs of the marketplace or that we will
be successful in developing and marketing enhancements to our existing
products or products incorporating new technology on a timely basis. Failure
to develop and introduce new products, or enhancements to existing products,
in a timely manner in response to changing market conditions or customer
requirements, will materially and adversely affect the Company's business,
results of operations and financial condition.
RISK OF SOFTWARE DEFECTS
The software products we offer are internally complex and, despite extensive
testing and quality control, may contain errors or defects, especially when we
first introduced them. We may need to issue corrective releases of our
software products to fix these defects or errors. These defects and errors
could also cause damage to our reputation, loss of revenue, product returns or
order cancellations, or lack of market acceptance of our products.
Accordingly, these defects and errors could have a material and adverse effect
on our business, results of operations and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in
our license agreements may not be effective as a result of existing or future
federal, state or local laws or ordinances or unfavorable judicial decisions.
Although we have not experienced any product liability claims to date, sale in
and supporting of our products entails the risk of such claims, which could be
substantial in light of the use of such products in mission-critical
applications. If a claimant successfully brings a product liability claim
against us, it could have a material adverse effect on our business, results
of operations and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY; RISK OF INFRINGEMENT
Our success depends upon our proprietary technology. We rely on a
combination of patent, copyright, trademark and trade secret rights,
confidentiality procedures and licensing arrangements to establish and protect
our proprietary rights. No assurance can be given that competitors will not
successfully challenge the validity or scope of our patents or that such
patents will provide a competitive advantage to us.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and corporate partners
and into license agreements with respect to our software, documentation and
other proprietary information. Despite these precautions, third parties could
copy or otherwise obtain and use our products or technology without
authorization, or to develop similar technology independently. In particular,
we have, in the past, provided certain hardware OEMs with access to our source
code and any unauthorized publication or proliferation of this source code
could materially adversely affect our business, operating results and
financial condition. It is difficult for us to police unauthorized use of our
products, and although we are unable to determine the extent to which piracy
of our software products exists, software piracy is a persistent problem.
Effective protection of intellectual property rights is unavailable or limited
in certain foreign countries. There can be no assurance that the protection of
our proprietary rights will be adequate or that our competitors will not
independently develop similar technology, duplicate our products or design
around any patents or other intellectual property rights we hold.
We do not believe that any of our products infringe the proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim the Company's current or future products infringe their rights. Any
such claims, with or without merit, could cause costly litigation that could
absorb significant management time, which could materially adversely effect
our business, operating results and financial condition. Such claims might
require us to enter into royalty or license agreements. If required, the
Company may not be able to obtain such royalty or license agreements, or
obtain them on terms acceptable to us, which could have a material adverse
effect upon the Company's business, operating results and financial condition.
14
<PAGE>
CONTROL BY MANAGEMENT AND CURRENT STOCKHOLDERS
As of October 1, 1998, BEA's officers and directors and their affiliates, in
the aggregate, had voting control over approximately 53.2 percent of BEA's
voting Common Stock. In particular, Warburg, Pincus Ventures, L.P. ("Warburg")
had voting control over approximately 49 percent of BEA's voting Common Stock
and beneficially owned approximately 56.3 percent of BEA's Common Stock (which
includes the non-voting Class B Common Stock owned by Warburg). As a result,
these stockholders will be able to control all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. The voting power of Warburg combined with BEA's
officers and directors under certain circumstances could have the effect of
delaying or preventing a change in control of BEA.
SIGNIFICANT LEVERAGE; DEBT SERVICE
In connection with our sale of 4% Convertible Subordinated Notes in June
1998, we incurred $250 million in long-term indebtedness. Our principal and
interest payment obligations increased substantially because of this
indebtedness. The degree to which we are leveraged could materially and
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make us more vulnerable to industry
downturns and competitive pressures. These notes are convertible into Common
Stock, which conversion could cause substantial dilution to stockholders and
increase the number of shares eligible for sale in the market, but would
otherwise eliminate the need for the Company to repay the principal amount of
such converted notes. There can be no assurance, however, that any of these
notes will be converted. Our ability to meet our debt service obligations will
be dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of which are beyond
our control.
We will require substantial amounts of cash to fund scheduled payments of
interest on these notes, payment of the principal amount of these notes,
payment of principal and interest on our other indebtedness, future capital
expenditures and any increased working capital requirements. If we cannot meet
our cash requirements out of cash flow from operations, there can be no
assurance that we will be able to obtain alternative financing. If we cannot
obtain such financing, our ability to respond to changing business and
economic conditions, to make future acquisitions, to absorb adverse operating
results or to fund capital expenditures or increased working capital
requirements may be adversely affected. If we do not generate sufficient
increases in cash flow from operations to repay these notes at maturity, we
could attempt to refinance these notes; however, such a refinancing may not be
available on terms acceptable to us, if at all. Any failure by us to satisfy
our obligations with respect to these notes at maturity (with respect to
payments of principal) or prior thereto (with respect to payments of interest
or required repurchases) would constitute a default under the indenture
entered into in connection with the issuance of these notes and could cause a
default under agreements governing other indebtedness, if any, of BEA.
15
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth certain information regarding the offer and
sale of the Securities by the Selling Securityholders and is based on
information provided to the Company by the Selling Securityholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED COMPLETION OF
PRIOR TO OFFERING(1) OFFERING(1)(3)
----------------------- -----------------------
PERCENTAGE
OF SHARES PERCENTAGE
SELLING SECURITYHOLDERS NUMBER CLASS(2) OFFERED NUMBER OF CLASS(2)
----------------------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Goldman, Sachs & Co. ... 708,165 1.2% 708,165 **
$18,700,000* 7.5% $18,700,000* 0 **
CFW-C, L.P. ............ 397,632 ** 397,632 **
$10,500,000* 4.2% $10,500,000* 0 **
IDS Life Aggressive
Growth Fund............ 378,698 ** 378,698 300,000 **
$10,000,000* 4.0% $10,000,000* **
BNP Arbitrage SNC....... 356,922 ** 356,922 **
$ 9,425,000 3.8% $ 9,425,000 0 **
Mainstay Convertible
Fund................... 322,840 ** 322,840 **
$ 8,525,000* 3.4% $ 8,525,000* 0 **
Alexandra Global Invest-
ment Fund 1 Ltd. ...... 302,958 ** 302,958 **
$ 8,000,000* 3.2% $ 8,000,000* 0 **
Tribech Investments,
LLC.................... 302,958 ** 302,958 **
$ 8,000,000* 3.2% $ 8,000,000* 0 **
Fidelity Financial
Trust:
Fidelity Convertible Se-
curities Fund.......... 284,023 ** 284,023 **
$ 7,500,000* 3.0% $ 7,500,000* 0 **
Deutsche Bank Securities
Inc. .................. 252,780 ** 252,780 **
$ 6,675,000* 2.7% $ 6,675,000* 0 **
Argent Classic
Convertible Arbitrage
Fund (Bermuda) L.P. ... 246,153 ** 246,153 **
$ 6,500,000* 2.6% $ 6,500,000* 0 **
Highbridge Capital Cor-
poration............... 246,153 ** 246,153 **
$ 6,500,000* 2.6% $ 6,500,000* 0 **
Delta Airlines Inc. Re-
tirement Plan.......... 242,366 ** 242,366 **
$ 6,400,000* 2.6% $ 6,400,000* 0 **
State of Oregon Equity.. 227,218 ** 227,218 **
$ 6,000,000 2.4% $ 6,000,000 0 **
CA Public Employee's Re-
tirement System........ 208,283 ** 208,283 **
$ 5,500,000* 2.2% $ 5,500,000* 0 **
Argent Classic
Convertible Arbitrage
Fund L.P. ............. 198,186 ** 198,186 **
$ 5,250,000 2.1% $ 5,250,000 0 **
The Travelers Indemnity
Company................ 183,971 ** 183,971 **
$ 4,858,000* 1.9% $ 4,858,000* 0 **
Chase Manhattan NA,
Trustee for IBM
Retirement Plan dated
12/18/45............... 175,526 ** 175,526 **
$ 4,635,000* 1.9% $ 4,635,000* 0 **
BT Holdings (New York),
Inc. .................. 170,414 ** 170,414 **
$ 4,500,000* 1.8% $ 4,500,000* 0 **
State of Connecticut
Combined Investment
Funds.................. 154,130 ** 154,130 0 **
$ 4,070,000 1.6% $ 4,070,000 0 **
State of Oregon/SAIF
Corporation............ 151,479 ** 151,479 **
$ 4,000,000* 1.6% $ 4,000,000* 0 **
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED COMPLETION OF
PRIOR TO OFFERING(1) OFFERING(1)(3)
---------------------- -----------------------
PERCENTAGE
OF SHARES PERCENTAGE
SELLING SECURITYHOLDERS NUMBER CLASS(2) OFFERED NUMBER OF CLASS(2)
----------------------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Shepherd Investments In-
ternational, Ltd. ..... 142,011 ** 142,011 **
$3,750,000* 1.5% $3,750,000* 0 **
Stark International..... 142,011 ** 142,011 **
$3,750,000* 1.5% $3,750,000* 0 **
Chrysler Corporation
Master Retirement
Trust.................. 124,023 ** 124,023 **
$3,275,000 1.3% $3,275,000 0 **
OCM Convertible Trust... 122,318 ** 122,318 **
$3,230,000 1.2% $3,230,000 0 **
Allstate Insurance
Company................ 113,609 ** 113,609 **
$3,000,000* 1.2% $3,000,000* 0 **
Commonwealthlife
Insurance Comp.
(Teamsters-Camden Non-
Enhanced).............. 113,609 ** 113,609 **
$3,000,000* 1.2% $3,000,000* 0 **
Investcorp--SAM Fund
Limited................ 113,609 ** 113,609 **
$3,000,000* 1.2% $3,000,000* 0 **
Offense Group
Associates, L.P. ...... 113,609 ** 113,609 **
$3,000,000* 1.2% $3,000,000* 0 **
David A. Stichter....... 113,609 ** 113,609 **
$3,000,000* 1.2% $3,000,000* 0 **
Susquehanna Capital
Group.................. 113,609 ** 113,609 **
$3,000,000* 1.2% $3,000,000* 0 **
Vanguard Convertible
Securities Fund,
Inc. .................. 112,473 ** 112,473 **
$2,970,000 1.1% $2,970,000 0 **
Minnesota Mutual Life
Insurance Company...... 109,324 ** 109,324 **
$2,900,000* 1.2% $2,900,000* 0 **
Bankers Trust, Trustee
for Chrysler Corp Emp
#1 Pension Plan dated
4/1/89................. 103,005 ** 103,005 **
$2,720,000* 1.1% $2,720,000* 0 **
Golden Rule Insurance
Company................ 98,461 ** 98,461 **
$2,600,000* 1.0% $2,600,000* 0 **
PRIM Board.............. 93,727 ** 93,727 **
$2,475,000 ** $2,475,000 0 **
Convertible Fund........ 88,085 ** 88,085 **
$2,326,000* ** $2,326,000* 0 **
Lincoln National
Convertible Securities
Fund................... 77,065 ** 77,065 **
$2,035,000* ** $2,035,000* 0 **
Argent Offshore Fund
L.P. .................. 75,739 ** 75,739 **
$2,000,000* ** $2,000,000* 0 **
Hamilton Global
Investors Limited...... 75,739 ** 75,739 **
$2,000,000* ** $2,000,000* 0 **
St. Albans Partners
Ltd. .................. 75,739 ** 75,739 **
$2,000,000* ** $2,000,000* 0 **
Weyerhaeuser Company
Master Retirement Trust
Convertible Arbitrage.. 75,739 ** 75,739 **
$2,000,000* ** $2,000,000* 0 **
Raytheon Company Master
Pension Trust.......... 75,171 ** 75,171 **
$1,985,000* ** $1,985,000* 0 **
San Diego County
Convertible............ 74,717 ** 74,717 **
$1,973,000* ** $1,973,000* 0 **
The Travelers Insurance
Company................ 69,188 ** 69,188 **
$1,827,000* ** $1,827,000* 0 **
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED COMPLETION OF
PRIOR TO OFFERING(1) OFFERING(1)(3)
---------------------- -----------------------
PERCENTAGE
OF SHARES PERCENTAGE
SELLING SECURITYHOLDERS NUMBER CLASS(2) OFFERED NUMBER OF CLASS(2)
----------------------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Arkansas PERS........... 65,325 ** 65,325 **
$1,725,000* ** $1,725,000* 0 **
Delta Air Lines Master
Trust.................. 57,940 ** 57,940 **
$1,530,000* ** $1,530,000* 0 **
Providian Life & Health
(Camden)............... 56,804 ** 56,804 **
$1,500,000* ** $1,500,000* 0 **
State Street Bank Custo-
dian for GE Pension
Trust.................. 54,153 ** 54,153 **
$1,430,000* ** $1,430,000* 0 **
The Northwestern Mutual
Life Insurance ** **
Company................ 47,337 ** 47,337 **
$1,250,000* ** $1,250,000* 0 **
Delta Airlines Master
Trust.................. 46,390 ** 46,390 **
$1,225,000* ** $1,225,000* 0 **
Delaware PERS........... 44,497 ** 44,497 **
$1,175,000 ** $1,175,000 0 **
State Employee's
Retirement Fund of the
State of Delaware...... 43,739 ** 43,739 **
$1,155,000 ** $1,155,000 0 **
New York Life Separate
Account #7............. 38,816 ** 38,816 **
$1,025,000* ** $1,025,000* 0 **
Allegheny Teledyne Inc.
Pension Plan........... 37,869 ** 37,869 **
$1,000,000* ** $1,000,000* **
Arpeggio Fund, LP....... 37,869 ** 37,869 0 **
$1,000,000* ** $1,000,000* 0 **
BT Alex. Brown Inc...... 37,869 ** 37,869 **
$1,000,000* ** $1,000,000* 0 **
Duckbill & Co........... 37,869 ** 37,869 **
$1,000,000* ** $1,000,000* 0 **
Hamilton Partners
Limited................ 37,869 ** 37,869 0 **
$1,000,000* ** $1,000,000* **
The Retail Clerks
Pension Plan........... 37,869 ** 37,869 0 **
$1,000,000* ** $1,000,000* **
The Dow Chemical Company
Employees' Retirement
Plan................... 33,136 ** 33,136 0 **
$ 875,000* ** $ 875,000* **
Mainstay VP Convertible
Portfolio.............. 30,295 ** 30,295 0 **
$ 800,000* ** $ 800,000* **
National Steel Corp..... 26,508 ** 26,508 0 **
$ 700,000* ** $ 700,000* **
Port Authority of
Allegheny County
Retirement & Disability
Allowance Plan for
Employees Represented
by Local 85 of the
Amalgamated Transit
Union.................. 24,615 ** 24,615 0 **
$ 650,000* ** $ 650,000* **
Starvest Combined
Portfolio.............. 24,615 ** 24,615 0 **
$ 650,000* ** $ 650,000* **
San Diego City
Retirement............. 24,274 ** 24,274 0 **
$ 650,000* ** $ 650,000* **
AIG/National Union Fire
Insurance--FRIC........ 20,828 ** 20,828 0 **
$ 550,000* ** $ 550,000* **
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED COMPLETION OF
PRIOR TO OFFERING(1) OFFERING(1)(3)
-------------------------- ------------------------
PERCENTAGE SHARES PERCENTAGE
SELLING SECURITYHOLDERS NUMBER OF CLASS(2) OFFERED NUMBER OF CLASS(2)
----------------------- ------------ ------------ -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Champion International
Corporation Master
Retirement Trust....... 19,881 ** 19,881 0 **
$ 525,000* ** $525,000* **
ICI American Holdings
Pension................ 19,881 ** 19,881 0 **
$ 525,000* ** $525,000* **
Zeneca Holdings Pension
Trust.................. 19,881 ** 19,881 0 **
$ 525,000* ** $525,000* **
Wake Forest University.. 19,124 ** 19,124 0 **
$ 505,000* ** 505,000* **
AFTRA Health Fund....... 18,934 ** 18,934 0 **
$ 500,000* ** 500,000* **
Glacier Water Services,
Inc.................... 18,934 ** 18,934 0 **
$ 500,000* ** $500,000* **
The Travelers Insurance
Company................ 18,934 ** 18,934 0 **
$ 500,000* ** $500,000* **
RJR Nabisco, Inc.
Defined Benefit Master
Trust.................. 15,147 ** 15,147 0 **
$ 400,000* ** $400,000* **
Partner Reinsurance
Company, Ltd. ......... 14,769 ** 14,769 0 **
$ 390,000* ** $390,000* **
SPT..................... 12,307 ** 12,307 0 **
$ 325,000* ** $325,000* **
Walker Art Center....... 10,035 ** 10,035 0 **
$ 265,000* ** $265,000* **
Bancroft Convertible
Fund, Inc.............. 9,467 ** 9,467 0 **
$ 250,000* ** $250,000* **
Brown & Williamson To-
bacco Corp.
Master Retirement
Trust................. 9,467 ** 9,467 0 **
$ 250,000* ** $250,000* **
Ellsworth Convertible
Growth
and Income Fund, Inc... 9,467 ** 9,467 0 **
$ 250,000* ** $250,000* **
Nalco Chemical Company.. 9,467 ** 9,467 0 **
$ 250,000 ** $250,000 **
Engineers Joint Pension
Fund................... 8,520 ** 8,520 0 **
$ 225,000* ** $225,000* **
United Food and
Commercial Workers
Local 1262 and
Employers Pension
Fund................... 8,520 ** 8,520 0 **
$ 225,000* ** $225,000* **
Franklin & Marshall
College................ 8,142 ** 8,142 0 **
$ 215,000* ** $215,000* **
The Travelers Life &
Annuity Company........ 8,142 ** 8,142 0 **
$ 215,000* ** $215,000* **
Mainstay Strategic Value
Fund................... 6,627 ** 6,627 0 **
$ 175,000* ** $175,000* **
Univar Corporation...... 6,437 ** 6,437 0 **
$ 170,000* ** $170,000* **
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
SHARES BENEFICIALLY OWNED AFTER
OWNED COMPLETION OF
PRIOR TO OFFERING(1) OFFERING(1)(3)
---------------------- -----------------------
PERCENTAGE
OF SHARES PERCENTAGE
SELLING SECURITYHOLDERS NUMBER CLASS(2) OFFERED NUMBER OF CLASS(2)
----------------------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
Baptist Health.......... 4,923 ** 4,923 0 **
$ 130,000* ** $ 130,000* **
Dunham & Assoc. Fund
III.................... 4,923 ** 4,923 0 **
$ 130,000* ** $ 130,000* **
Associated Electric &
Gas Insurance Services
Limited................ 3,786 ** 3,786 0 **
$ 100,000* ** $ 100,000* **
The Travelers Series
Trust Convertible Bond
Portfolio.............. 3,786 ** 3,786 0 **
$ 100,000* ** $ 100,000* **
Unifi, Inc. Profit
Sharing Plan and
Trust.................. 3,029 ** 3,029 0 **
$ 80,000* ** $ 80,000* **
Boston Museum of Fine
Art.................... 2,423 ** 2,423 0 **
$ 64,000* ** $ 64,000* **
Kettering Medical Center
Funded Depreciation
Account................ 1,514 ** 1,514 0 **
$ 40,000* ** $ 40,000* **
The Fondren Foundation.. 1,136 ** 1,136 **
$ 30,000* ** $ 30,000* 0 **
Island Holdings, Inc.... 946 ** 946 **
$ 25,000* ** $ 25,000* 0 **
Inland Foundation Inc... 378 ** 378 **
$ 10,000* ** $ 10,000* 0 **
Dunham & Assoc. Fund
II..................... 227 ** 227 **
$ 6,000* ** $ 6,000* 0 **
BS Debt Income Fund-
Class A................ 189 ** 189 **
$ 5,000* ** $ 5,000* 0 **
Unnamed holders of
Securities or any
future transferees,
pledges, donees or
successors of or from
any such unnamed holder
....................... 376,926 ** 376,926 0 **
$9,940,000 4.0 $9,940,000 0 **
</TABLE>
- --------
* Amount of Notes
** Less than one percent
% Percentage of Notes held by such Selling Securityholder
(1) Share amounts assume conversion of the Notes, at an assumed conversion
rate of 37.8698 shares per $1,000 principal amount of Notes.
(2) Based upon approximately 56,998,000 shares of voting Common Stock and an
aggregate amount of $250,000,000 of Notes outstanding as of October 1,
1998. Does not include 17,823,550 shares of nonvoting Class B Common
Stock.
(3) Assumes offer and sale of all Securities, although Selling Securityholders
are not obligated to sell any Securities.
20
<PAGE>
DESCRIPTION OF NOTES
The Notes were issued under an Indenture, dated as of June 1, 1998 (the
"Indenture"), between the Company and State Street Bank and Trust Company of
California, N.A., as Trustee (the "Trustee"), copies of which are available
for inspection at the Corporate Trust Office of the Trustee in the Borough of
Manhattan, The City of New York. Wherever particular defined terms of the
Indenture (including the Notes and the various forms thereof) are referred to,
such defined terms are incorporated herein by reference (the Notes and various
terms relating to the Notes being referred to in the Indenture as "Indenture
Securities"). References in this section to the "Company" are solely to BEA
Systems, Inc. and not its subsidiaries. The following summaries of certain
provisions of the Indenture do not purport to be complete and are subject to,
and are qualified in their entirety by reference to, the detailed provisions
of the Notes and the Indenture, including the definitions therein of certain
terms.
GENERAL
The Notes are unsecured subordinated obligations of the Company, are limited
to $250,000,000 aggregate principal amount and mature on June 15, 2005 and be
payable at a price of 100% of the principal amount thereof. The Notes bear
interest at the rate of 4% per annum from June 12, 1998, payable semiannually
on June 15 and December 15 of each year, commencing on December 15, 1998.
Interest payable per $1,000 principal amount of Notes for the period from June
12, 1998 to December 15, 1998 will be $20.33.
The Notes will be convertible into Common Stock initially at the conversion
rate of 37.8698 shares per $1,000 principal amount of Notes, subject to
adjustment upon the occurrence of certain events described under "--Conversion
Rights," at any time on or after the 90th day following the initial issue date
of the Notes and prior to the close of business on the maturity date, unless
previously redeemed or repurchased.
The Notes were initially offered and sold to Qualified Institutional Buyers
as defined under Rule 144A under the Securities Act ("Qualified Institutional
Buyers") in reliance on Rule 144A.
GLOBAL NOTE; BOOK-ENTRY SYSTEM
Notes held by Qualified Institutional Buyers as defined in Rule 144A under
the Securities Act (each a "Qualified Institutional Buyer"), have initially
been evidenced by one or more global Notes in definitive, fully registered
form without interest coupons (collectively, the "Global Note"), which was
deposited with the Trustee as custodian for DTC and registered in the name of
Cede & Co. ("Cede"), as nominee of DTC. The Global Note (and any notes issued
in exchange therefor) will be subject to certain restrictions on transfer set
forth therein and in the Indenture and will bear the legend regarding such
restrictions set forth under "Notice to Investors." Except as set forth below,
record ownership of the Global Note may be transferred, in whole or in part,
only to another nominee of DTC or to a successor of DTC or its nominee.
Qualified Institutional Buyers have initially beneficially owned interests
in the Global Note held by DTC only through participants in DTC
("Participants") or certain banks, brokers, dealers, trust companies and other
parties that clear through or maintain a custodial relationship with a
Participant either directly or indirectly ("Indirect Participants"). Qualified
Institutional Buyers have been permitted to hold their interests in the Global
Note directly through DTC if such Qualified Institutional Buyers are
participants in DTC or indirectly through organizations that are Participants.
Transfers between Participants are effected in the ordinary way in accordance
with DTC's rules and are settled in same-day funds. The laws of some states
require that certain persons take physical delivery of securities in
definitive form. Consequently, the ability to transfer beneficial interests in
the Global Note to such persons may be limited.
Cash payment of interest on and principal of and the redemption or
repurchase of the Global Note, as well as any payment of Liquidated Damages,
will be made to Cede, the nominee for DTC, as the registered owner of the
Global Note, by wire transfer of immediately available funds on each relevant
payment date. Neither the
21
<PAGE>
Company nor the Trustee has any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Global Note, including for any delay by DTC or any
Participant or Indirect Participant in identifying the beneficial ownership
interests, and the Company and the Trustee may conclusively rely on, and shall
be protected in relying on, instructions from DTC for all purposes.
The Company has been informed that, with respect to any cash payment of
interest on, principal of, or the redemption or repurchase price of, the
Global Note, as well as any payment of Liquidated Damages, DTC's practice is
to credit Participants' accounts on the payment date therefor with payments in
amounts proportionate to their respective beneficial interests in the Notes
represented by the Global Note as shown on the records of DTC (adjusted as
necessary so that such payments are made with respect to whole Notes only),
unless DTC has reason to believe that it will not receive payment on such
payment date. Payments by Participants to owners of beneficial interests in
Notes represented by the Global Note held through such Participants will be
the responsibility of such Participants, as is now the case with securities
held for the accounts of customers registered in "street name."
Redemption notices shall be sent to Cede. If less than all the Notes are
being redeemed, DTC's practice is to determine by lot the amount of the
holdings of each Participant in such issue to be redeemed.
Neither DTC or Cede will consent or vote with respect to the Notes. Under
its usual procedures, DTC mails an omnibus proxy (the "Omnibus Proxy") to the
issuer as soon as possible after the record date. The Omnibus Proxy assigns
Cede's consenting or voting rights to those Participants to whose accounts the
Notes are credited on the record date identified in a listing attached to the
Omnibus Proxy.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants, the ability of a person having a beneficial
interest in the principal amount represented by the Global Note to pledge such
interest to persons or entities that do not participate in the DTC book-entry
system, or otherwise take actions in respect of such interest, may be affected
by the lack of a physical certificate evidencing such interest.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more Participants to whose
account with DTC interests in the Global Note are credited and only in respect
of such portion of the principal amount of the Notes represented by the Global
Note as to which such Participant or Participants has or have given such
direction.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code, as amended, and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and facilitate the clearance and
settlement of securities transactions between Participants through electronic
book-entry changes in accounts of its Participants, thereby eliminating the
need for physical transfer and delivery of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own
DTC. Indirect access to the DTC system is available to other entities such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly. The
rules applicable to DTC and its Participants are on file with the Commission.
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of beneficial ownership interests in the Global Note among
Participants, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but
the Company takes no responsibility for the accuracy
22
<PAGE>
thereof. None of the Company, the Trustee nor any of their respective agents
will have any responsibility for the performance by DTC, its Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations, including maintaining, supervising or
reviewing the records relating to, or payments made on account of, beneficial
ownership interests in the Global Note.
So long as DTC, or its nominee, is the registered owner of the Global Note,
DTC or its nominee, as the case may be, will be considered the sole legal
owner or holder of the Notes represented by the Global Note for all purposes
under the Indenture. Except as set forth below, owners of beneficial interests
in such Global Note will not be entitled to have Notes represented by the
Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Notes in definitive form and will not be
considered the legal owners or holder thereof under the Indenture.
Accordingly, each person owning a beneficial interest in the Global Note must
rely on the procedures of DTC and, if such person is not a Participant, those
of the Participant through which such person owns its interests, in order to
exercise any rights of a holder under the Indenture or such Note.
If DTC is at any time unwilling, unable or ineligible to continue as
depository and a successor depository is not appointed by the Company within
90 days, the Company will issue Notes in definitive registered form, without
coupons, in denominations of $1,000 of principal amount at maturity and any
integral multiple thereof, in exchange for the Global Note representing such
Notes. In addition, the Company may at any time and in its sole discretion
determine not to have any Notes in registered form represented by the Global
Note and, in such event, will issue Notes in definitive registered form,
without coupons, in exchange for the Global Note representing such Notes. In
any such instance, an owner of a beneficial interest in the Global Note will
be entitled to physical delivery in definitive form of Notes represented by
such Global Note equal in principal amount to such beneficial interest and to
have such Notes registered in its name.
CONVERSION RIGHTS
The Holder of any Note has the right, at the Holder's option, to convert any
portion of the principal amount of any Note that is an integral multiple of
$1,000 into shares of Common Stock at any time on or after the 90th day
following the original issue date of the Notes and prior to the close of
business on the maturity date, unless previously redeemed or repurchased, at a
conversion rate of 37.8698 shares of Common Stock per $1,000 principal amount
of Notes (the "Conversion Rate") (equivalent to an approximate conversion
price of $26.41 per share of Common Stock), subject to adjustment in certain
events as described below. The right to convert a Note called for redemption
or delivered for repurchase will terminate at the close of business on the
Redemption Date for such Note or the Repurchase Date, as the case may be.
The right of conversion attaching to any Note may be exercised by the Holder
by delivering the Note at the Corporate Trust Office of the Trustee in the
Borough of Manhattan, The City of New York, accompanied by a duly signed and
completed notice of conversion. Such notice of conversion can be obtained at
the office of the Trustee at its Corporate Trust Office in New York City. The
conversion date will be the date on which the Note and the duly signed and
completed notice of conversion are so delivered.
As promptly as practicable on or after the conversion date, the Company will
issue and deliver to the Trustee a certificate or certificates for the number
of full shares of Common Stock issuable upon conversion, together with payment
in lieu of any fraction of a share; such certificate will be sent by the
Trustee to the Conversion Agent for delivery to the Holder. Such shares of
Common Stock issuable upon conversion of the Notes, in accordance with the
provisions of the Indenture, will be fully paid and nonassessable and will
rank pari passu with the other shares of Common Stock of the Company
outstanding from time to time. Any Note surrendered for conversion during the
period from the close of business on any Regular Record Date to the opening of
business on the next succeeding Interest Payment Date (except Notes (or
portions thereof) called for redemption on a Redemption Date or to be
repurchased on a Repurchase Date and, as a result, the right to convert such
Notes would terminate during such period) must be accompanied by payment of an
amount equal to the interest payable on such Interest Payment Date on the
principal amount of Notes being surrendered for conversion. In
23
<PAGE>
the case of any Note which has been converted after any Regular Record Date
but before the next succeeding Interest Payment Date, interest payable on such
Interest Payment Date shall be payable on such Interest Payment Date
notwithstanding such conversion, and such interest shall be paid to the Holder
of such Note on such Regular Record Date. As a result of the foregoing
provisions, Holders that surrender Notes for conversion on a date that is not
an Interest Payment Date will not receive any interest for the period from the
Interest Payment Date next preceding the date of conversion to the date of
conversion or for any later period, even if the Notes are surrendered after a
notice of redemption (except for the payment of interest on Notes called for
redemption on a Redemption Date or to be repurchased on a Repurchase Date for
which the right to convert such Notes would terminate between a Regular Record
Date and the Interest Payment Date to which it relates). No other payment or
adjustment for interest, or for any dividends in respect of Common Stock, will
be made upon conversion. Holders of Common Stock issued upon conversion will
not be entitled to receive any dividends payable to holders of Common Stock as
of any record time or date before the close of business on the conversion
date. No fractional shares will be issued upon conversion but, in lieu
thereof, an appropriate amount will be paid in cash by the Company based on
the market price of the Common Stock at the close of business on the day of
conversion.
A Holder delivering a Note for conversion will not be required to pay any
taxes or duties in respect of the issue or delivery of Common Stock on
conversion but will be required to pay any tax or duty which may be payable in
respect of any transfer involved in the issue or delivery of the Common Stock
in a name other than that of the Holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the Holder have been paid.
The Conversion Rate is subject to adjustment in certain events, including,
without duplication: (a) dividends (and other distributions) payable in Common
Stock on shares of capital stock of the Company, (b) the issuance to all
holders of Common Stock of rights, options or warrants entitling them to
subscribe for or purchase Common Stock at less than the then Current Market
Price of such Common Stock (determined as provided in the Indenture) as of the
record date for shareholders entitled to receive such rights, options or
warrants, (c) subdivisions, combinations and reclassifications of Common
Stock, (d) distributions to all holders of Common Stock of evidences of
indebtedness of the Company, shares of capital stock, cash or assets
(including securities, but excluding those dividends, rights, options,
warrants and distributions referred to above, dividends and distributions paid
exclusively in cash and distributions upon mergers or consolidations to which
the next succeeding paragraph applies), (e) distributions consisting
exclusively of cash (excluding any cash portion of distributions referred to
in (d) above, or cash distributed upon a merger or consolidation to which the
next succeeding paragraph applies) to all holders of Common Stock in an
aggregate amount that, combined together with (i) other such all-cash
distributions made within the preceding 12 months in respect of which no
adjustment has been made and (ii) any cash and the fair market value of other
consideration payable in respect of any tender offer by the Company or any of
its subsidiaries for Common Stock concluded within the preceding 12 months in
respect of which no adjustment has been made, exceeds 10% of the Company's
market capitalization (being the product of the Current Market Price per share
of the Common Stock on the record date for such distribution and the number of
shares of Common Stock then outstanding), and (f) the successful completion of
a tender offer made by the Company or any of its subsidiaries for Common Stock
which involves an aggregate consideration that, together with (i) any cash and
other consideration payable in a tender offer by the Company or any of its
subsidiaries for Common Stock expiring within the 12 months preceding the
expiration of such tender offer in respect of which no adjustment has been
made and (ii) the aggregate amount of any such all-cash distributions referred
to in (e) above to all holders of Common Stock within the 12 months preceding
the expiration of such tender offer in respect of which no adjustments have
been made, exceeds 10% of the Company's market capitalization on the
expiration of such tender offer. The Company reserves the right to make such
increases in the Conversion Rate in addition to those required in the
foregoing provisions as it considers to be advisable in order that any event
treated for United States federal income tax purposes as a dividend of stock
or stock rights will not be taxable to the recipients. No adjustment of the
Conversion Rate will be required to be made until the cumulative adjustments
amount to 1.0% or more of the Conversion Rate. The Company will compute any
adjustments to the Conversion Rate pursuant to this paragraph and will give
notice by mail to Holders of the Registered Notes of any adjustments.
24
<PAGE>
In case of any consolidation or merger of the Company with or into another
Person or any merger of another Person into the Company (other than a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the Common Stock), or in case of any sale or transfer of all
or substantially all of the assets of the Company, each Note then outstanding
will, without the consent of the Holder of any Note, become convertible only
into the kind and amount of securities, cash and other property receivable
upon such consolidation, merger, sale or transfer by a holder of the number of
shares of Common Stock into which such Note was convertible immediately prior
thereto (assuming such holder of Common Stock failed to exercise any rights of
election and that such Note was then convertible).
The Company from time to time may increase the Conversion Rate by any amount
for any period of at least 20 days, in which case the Company shall give at
least 15 days notice of such increase, if the Board of Directors has made a
determination that such increase would be in the best interests of the
Company, which determination shall be conclusive. No such increase shall be
taken into account for purposes of determining whether the last reported bid
price of the Common Stock exceeds the conversion price by 105% in connection
with an event which otherwise would be a Change in Control or for purposes of
determining whether the last reported bid price of the Common Stock is at
least 140% of the conversion price in connection with conditional redemption
of the Notes at the option of the Company.
If at any time the Company makes a distribution of property to its
stockholders which would be taxable to such stockholders as a dividend for
United States federal income tax purposes (e.g., distributions of evidences of
indebtedness or assets of the Company, but generally not stock dividends on
common stock or rights to subscribe for common stock) and, pursuant to the
anti-dilution provisions of the Indenture, the number of shares into which
Notes are convertible is increased, such increase may be deemed for federal
income tax purposes to be the payment of a taxable dividend to Holders of
Notes. See "Certain United States Federal Income Tax Considerations--U.S.
Holders--Distributions on Common Stock."
SUBORDINATION
The payment of the principal of, premium, if any, and interest on the Notes
(including any Liquidated Damages (as defined) and any amounts payable upon
the redemption or the repurchase of the Notes permitted by the Indenture) will
be subordinated in right of payment to the extent set forth in the Indenture
to the prior payment in full of the principal of, premium, if any, interest
and other amounts in respect of all Senior Indebtedness of the Company. The
principal amount of outstanding Senior Indebtedness was approximately $0.8
million at September 30, 1998 and the Company's subsidiaries had approximately
$30.0 million of indebtedness and other liabilities outstanding (excluding
liabilities of a type not required to be reflected on a balance sheet in
accordance with generally accepted accounting principles and intercompany
liabilities) to which the Notes would have been effectively subordinated.
"Senior Indebtedness" is defined in the Indenture to mean: the principal of
(and premium, if any) and interest (including all interest accruing subsequent
to the commencement of any bankruptcy or similar proceeding, whether or not a
claim for post-petition interest is allowable as a claim in any such
proceeding) on, and all fees and other amounts payable in connection with, the
following, whether absolute or contingent, secured or unsecured, due or to
become due, outstanding on the date of the Indenture or thereafter created,
incurred or assumed: (a) indebtedness of the Company evidenced by a credit or
loan agreement, note, bond, debenture or other written obligation, (b) all
obligations of the Company for money borrowed, (c) all obligations of the
Company evidenced by a note or similar instrument given in connection with the
acquisition of any businesses, properties or assets of any kind, (d)
obligations of the Company (i) as lessee under leases required to be
capitalized on the balance sheet of the lessee under generally accepted
accounting principles or (ii) as lessee under other leases for facilities,
capital equipment or related assets, whether or not capitalized, entered into
or leased for financing purposes, (e) all obligations of the Company under
interest rate and currency swaps, caps, floors, collars, hedge agreements,
forward contracts or similar agreements or arrangements, (f) all obligations
of the Company with respect to letters of credit, bankers' acceptances and
similar facilities (including reimbursement obligations with respect to the
foregoing), (g) all obligations of the Company issued or assumed
25
<PAGE>
as the deferred purchase price of property or services (but excluding trade
accounts payable and accrued liabilities arising in the ordinary course of
business), (h) all obligations of the type referred to in clauses (a) through
(g) above of another Person and all dividends of another Person, the payment
of which, in either case, the Company has assumed or guaranteed, or for which
the Company is responsible or liable, directly or indirectly, jointly or
severally, as obligor, guarantor or otherwise, or which is secured by a lien
on the property of the Company, and (i) renewals, extensions, modifications,
replacements, restatements and refundings of, or any indebtedness or
obligation issued in exchange for, any such indebtedness or obligation
described in clauses (a) through (h) of this paragraph; provided, however,
that Senior Indebtedness shall not include the Indenture Securities or any
such indebtedness or obligation if the terms of such indebtedness or
obligation (or the terms of the instrument under which, or pursuant to which
it is issued) expressly provide that such indebtedness or obligation is not
superior in right of payment to the Indenture Securities.
No payment on account of principal of, premium, if any, or interest on
(including any Liquidated Damages (as defined)), or the redemption or
repurchase of, the Notes may be made by the Company if (i) a default in the
payment of principal, premium, if any, or interest (including a default under
any repurchase or redemption obligation) or other amounts with respect to
Senior Indebtedness occurs and is continuing beyond the applicable grace
period or (ii) any other event of default occurs and is continuing with
respect to Designated Senior Debt (as defined below) that permits the holders
thereof to accelerate the maturity thereof, and the Trustee receives a notice
of such default (a "Payment Blockage Notice") from the Company, a holder of
such Designated Senior Debt or other person permitted to give such notice
under the Indenture. Payments on the Notes may and shall be resumed (a) in the
case of a Payment default, upon the date on which such default is cured or
waived and (b) in the case of a nonpayment default, the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date on
which the Payment Blockage Notice is received. No new period or payment
blockage may be commenced unless and until (i) 365 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal, premium, if any, and interest on the Notes
that have come due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage
Notice to the Trustee shall be, or be made, the basis for any subsequent
Payment Blockage Notice. "Designated Senior Debt" means the Company's
obligations under any particular Senior Indebtedness in which the instrument
creating or evidencing the same or the assumption or guarantee thereof (or
related agreements or documents to which the Company is a party) expressly
provides that such indebtedness shall be "Designated Senior Debt" for purposes
of the Indenture (provided that such instrument, agreement or other document
may place limitations and conditions on the right of such Senior Indebtedness
to exercise the rights of Designated Senior Debt). In addition, upon any
acceleration of the principal due on the Notes as a result of an Event of
Default or payment or distribution of assets of the Company to creditors upon
any dissolution, winding up, liquidation or reorganization, whether voluntary
or involuntary, marshaling of assets, assignment for the benefit of credits,
or in bankruptcy, insolvency, receivership or other similar proceedings of the
Company, all principal, premium, if any, interest and other amounts due on all
Senior Indebtedness must be paid in full before the Holders of the Notes are
entitled to receive any payment. By reason of such subordination, in the event
of insolvency, creditors of the Company who are holders of Senior Indebtedness
may recover more, ratably, than the Holders of the Notes, and such
subordination may result in a reduction or elimination of payments to the
Holders of the Notes.
In addition, the Notes will be structurally subordinated to all indebtedness
and other liabilities (including trade payables and lease obligations) of the
Company's subsidiaries, as any right of the Company to receive any assets of
its subsidiaries upon their liquidation or reorganization (and the consequent
right of the Holders of the Notes to participate in those assets) will be
effectively subordinated to the claims of that subsidiary's creditors
(including trade creditors), except to the extent that the Company itself is
recognized as a creditor of such subsidiary, in which case the claims of the
Company would still be subordinate to any security interest in the assets of
such subsidiary and any indebtedness of such subsidiary senior to that held by
the Company.
The Indenture does not limit the Company's or its subsidiaries' ability to
incur Senior Indebtedness or any other indebtedness.
26
<PAGE>
OPTIONAL REDEMPTION
The Notes are not subject to redemption at the option of the Company prior
to June 20, 2001 and are redeemable on and after such date at the option of
the Company, in whole or in part, upon not less than 30 nor more than 60 days
notice to each Holder, at the prices set forth below; provided, however, that
the Notes are not redeemable at the option of the Company following June 20,
2001 and before June 17, 2003 unless the last reported bid price for the
Common Stock is at least 140% of the conversion price for at least 20 trading
days within a period of 30 consecutive trading days ending within five trading
days of the call for redemption.
The redemption price (expressed as a percentage of principal amount) is as
follows for the 12-month periods beginning on June 15 of the following years
(June 20 through June 14 in the case of the first such period and June 17
through June 14 in the case of the third such period):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2001............................................................ 102.29%
2002............................................................ 101.71
2003............................................................ 101.14
2004............................................................ 100.57
</TABLE>
and thereafter is equal to 100% of the principal amount, in each case together
with accrued interest to the date of redemption.
No sinking fund is provided for the Notes.
PAYMENT AND CONVERSION
The principal of Notes are payable in U.S. dollars, against surrender
thereof at the Corporate Trust Office of the Trustee in the Borough of
Manhattan, The City of New York, by dollar check drawn on, or by transfer to a
dollar account (such transfer to be made only to Holders of an aggregate
principal amount of Notes in excess of $2,000,000) maintained by the Holder
with, a bank in New York City. Payment of any installment of interest on Notes
will be made to the Person in whose name such Note (or any predecessor Note)
is registered at the close of business on the June 1 or the December 1
(whether or not a Business Day) immediately preceding the relevant Interest
Payment Date (a "Regular Record Date"). Payments of such interest will be made
by a dollar check drawn on a bank in New York City mailed to the Holder at
such Holder's registered address or, upon application by the Holder thereof to
the Trustee not later than the applicable Regular Record Date, by transfer to
a dollar account (such transfer to be made only to Holders of an aggregate
principal amount of Notes in excess of $2,000,000) maintained by the Holder
with a bank in New York City. No transfer to a dollar account will be made
unless the Trustee has received written wire instructions not less than 15
days prior to the relevant payment date.
Payments in respect of the principal of (and premium, if any) and interest
on any Registered Global Note registered in the name of DTC or its nominee
will be payable by the Trustee to DTC or its nominee in its capacity as the
registered Holder under the Indenture. Under the terms of the Indenture, the
Company and the Trustee will treat the Persons in whose names the Notes,
including the Registered Global Note, are registered as the owners thereof for
the purpose of receiving such payments and for any and all other purposes
whatsoever. Consequently, neither the Company, the Trustee nor any agent of
the Company or the Trustee has or will have any responsibility or liability
for (i) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interests in the Registered Global Note, or for maintaining,
supervising or reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Registered Global Note, or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants.
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<PAGE>
Any payment on the Notes due on any day which is not a Business Day need not
be made on such day, but may be made on the next succeeding Business Day with
the same force and effect as if made on such due date, and no interest shall
accrue on such payment for the period from and after such date. "Business
Day," when used with respect to any place of payment, place of conversion or
any other place, as the case may be, means each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in such
place of payment, place of conversion or other place, as the case may be, are
authorized or obligated by law or executive order to close; provided, however,
that a day on which banking institutions in New York, New York are authorized
or obligated by law or executive order to close shall not be a Business Day
for certain purposes.
Notes may be surrendered for conversion at the Corporate Trust Office of the
Trustee in the Borough of Manhattan, The City of New York. Notes surrendered
for conversion must be accompanied by appropriate notices and any payments in
respect of interest or taxes, as applicable, as described above under "--
Conversion Rights."
The Company has initially appointed the Trustee as Paying Agent and
Conversion Agent. The Company may at any time terminate the appointment of any
Paying Agent or Conversion Agent and appoint additional or other Paying Agents
and Conversion Agents, provided that until the Notes have been delivered to
the Trustee for cancellation, or moneys sufficient to pay the principal of,
premium, if any, and interest on the Notes have been made available for
payment and either paid or returned to the Company as provided in the
Indenture, it will maintain an office or agency in the Borough of Manhattan,
The City of New York for surrender of Notes for conversion. Notice of any such
termination or appointment and of any change in the office through which any
Paying Agent or Conversion Agent will act will be given in accordance with "--
Notices" below.
All moneys deposited with the Trustee or any Paying Agent, or then held by
the Company, in trust for the payment of principal of, premium, if any, or
interest on any Notes which remain unclaimed at the end of two years after
such payment has become due and payable will be repaid to the Company, and the
Holder of such Note will thereafter look only to the Company for payment
thereof.
REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE IN CONTROL
If a Change in Control (as defined) occurs, each Holder of Notes shall have
the right, at the Holder's option, to require the Company to repurchase all of
such Holder's Notes not theretofore called for redemption, or any portion of
the principal amount thereof, that is $5,000 or an integral multiple of $1,000
in excess thereof, on the date (the "Repurchase Date") that is 45 days after
the date of the Company Notice (as defined), at a price equal to 100% of the
principal amount of the Notes to be repurchased, together with interest
accrued to the Repurchase Date (the "Repurchase Price").
The Company may, at its option, in lieu of paying the Repurchase Price in
cash, pay the Repurchase Price in Common Stock valued at 95% of the average of
the closing bid prices of the Common Stock for the five trading days
immediately preceding and including the third day prior to the Repurchase
Date; provided that payment may not be made in Common Stock unless the Company
satisfies certain conditions with respect to such payment prior to the
Repurchase Date as provided in the Indenture.
Within 30 days after the occurrence of a Change in Control, the Company is
obligated to give to all Holders of the Notes notice, as provided in the
Indenture (the "Company Notice"), of the occurrence of such Change in Control
and of the repurchase right arising as a result thereof. The Company must also
deliver a copy of the Company Notice to the Trustee. To exercise the
repurchase right, a Holder of Notes must deliver on or before the 30th day
after the date of the Company Notice irrevocable written notice to the Trustee
of the Holder's exercise of such right, together with the Notes with respect
to which the right is being exercised.
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<PAGE>
A Change in Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:
(i) the acquisition by any Person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) of the Exchange Act) of
beneficial ownership, directly or indirectly, through a purchase, merger or
other acquisition transaction or series of transactions, of shares of
capital stock of the Company entitling such Person to exercise 50% or more
of the total voting power of all shares of capital stock of the Company
entitled to vote generally in elections of directors, other than (A) any
such acquisition by the Company, any subsidiary of the Company or any
employee benefit plan of the Company or (B) any such acquisition by
Warburg, Pincus Ventures, L.P. or any person controlled by or under common
control with Warburg, Pincus Ventures, L.P., so long as any such
acquisition does not result, directly or indirectly, in a "going private
transaction" within the meaning of the Exchange Act; or
(ii) any consolidation or merger of the Company with or into, any other
Person, any merger of another Person into the Company, or any conveyance,
sale, transfer or lease of all or substantially all of the assets of the
Company to another Person (other than (a) any such transaction (x) which
does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of capital stock of the Company and (y)
pursuant to which the holders of the Common Stock immediately prior to such
transaction have the entitlement to exercise, directly or indirectly, 50%
or more of the total voting power of all shares of capital stock entitled
to vote generally in the election of directors of the continuing or
surviving corporation immediately after such transaction and (b) any merger
which is effected solely to change the jurisdiction of incorporation of the
Company and results in a reclassification, conversion or exchange of
outstanding shares of Common Stock into solely shares of common stock);
provided, however, that a Change in Control shall not be deemed to have
occurred if the closing bid price per share of the Common Stock for any
five trading days within the period of 10 consecutive trading days ending
immediately after the later of the Change in Control or the public
announcement of the Change in Control (in the case of a Change in Control
under clause (i) above) or the period of 10 consecutive trading days ending
immediately before the Change in Control (in the case of a Change in
Control under clause (ii) above) shall equal or exceed 105% of the
Conversion Price of the Notes in effect on each such trading day.
"Beneficial Owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act, as in effect on the
date of execution of the Indenture. "Person" includes any syndicate or
group which would be deemed to be a "person" under Section 13(d)(3) of the
Exchange Act.
Rule 13e-4 under the Exchange Act requires the dissemination of certain
information to security holders in the event of an issuer tender offer and may
apply in the event that the repurchase option becomes available to Holders of
the Notes. The Company will comply with this rule to the extent applicable at
that time.
The Company may, to the extent permitted by applicable law, at any time
purchase Notes in the open market or, by tender at any price or by private
agreement. Any Note so purchased by the Company may, to the extent permitted
by applicable law and subject to restrictions contained in the Purchase
Agreement, be re-issued or resold or may, at the Company's option, be
surrendered to the Trustee for cancellation. Any Notes surrendered as
aforesaid may not be re-issued or resold and will be canceled promptly.
The foregoing provisions would not necessarily afford Holders of the Notes
protection in the event of highly leveraged or other transactions involving
the Company that may adversely affect Holders.
The Company's ability to repurchase Notes upon the occurrence of a Change in
Control is subject to limitations. There can be no assurance that the Company
would have the financial resources, or would be able to arrange financing, to
pay the Repurchase Price for all the Notes that might be delivered by Holders
of Notes seeking to exercise the repurchase right. Moreover, although under
the Indenture the Company may elect, subject to satisfaction of certain
conditions, to pay the repurchase price for the Notes using shares of Common
Stock, Company's ability to repurchase Notes may be limited or prohibited by
the terms of borrowing arrangements, including Senior Indebtedness, existing
at the time of a Change in Control. The Company's ability to repurchase Notes
with cash may also be limited by the terms of its subsidiaries' borrowing
arrangements due to dividend
29
<PAGE>
restrictions. Any failure by the Company to repurchase the Notes when required
following a Change in Control would result in an Event of Default under the
Indenture whether or not such repurchase is permitted by the subordination
provisions of the Indenture. Any such default may, in turn, cause a default
under Senior Indebtedness of the Company. Moreover, the occurrence of a Change
in Control could result in an event of default under terms of other Senior
Indebtedness of the Company. As a result, in each case, any repurchase of the
Notes would, absent a waiver, be prohibited under the subordination provisions
of the Indenture until the Senior Indebtedness is paid in full. In addition,
the Company's repurchase of Notes as a result of the occurrence of a Change in
Control may be prohibited or limited by, or create an event of default under,
the terms of agreements related to borrowings which the Company may enter into
from time to time, including agreements relating to Senior Indebtedness. See
"--Subordination."
MERGERS AND SALES OF ASSETS BY THE COMPANY
The Company may not consolidate with or merge into any other Person or
convey, transfer, sell or lease its properties and assets substantially as an
entirety to any Person, and the Company shall not permit any Person to
consolidate with or merge into the Company or convey, transfer, sell or lease
such Person's properties and assets substantially as an entirety to the
Company unless (a) the Person formed by such consolidation or into or with
which the Company is merged or the Person to which the properties and assets
of the Company are so conveyed, transferred, sold or leased shall be a
corporation, limited liability company, partnership or trust organized and
existing under the laws of the United States, any State thereof or the
District of Columbia and, if other than the Company, shall expressly assume
the payment of the principal of, premium, if any, and interest on the Notes
and the performance of the other covenants of the Company under the Indenture,
and (b) immediately after giving effect to such transaction, no Event of
Default, and no event that, after notice or lapse of time or both, would
become an Event of Default, shall have occurred and be continuing.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of or premium, if any, on any Note when due, whether or not such
payment is prohibited by the subordination provisions of the Notes and the
Indenture; (b) failure to pay any interest (including any Liquidated Damages)
on any Note when due, continuing for 30 days, whether or not such payment is
prohibited by the subordination provisions of the Notes and the Indenture; (c)
failure to provide a Company Notice in the event of a Change in Control
whether or not such notice is prohibited by the subordination provisions of
the Notes and the Indenture; (d) failure to perform any other covenant of the
Company in the Indenture, continuing for 60 days after written notice as
provided in the Indenture; (e) any indebtedness under any bonds, debentures,
notes or other evidences of indebtedness for money borrowed (or any guarantee
thereof) by the Company or any Significant Subsidiary (as defined) in an
aggregate principal amount in excess of $10,000,000 is not paid at final
maturity thereof (either at its stated maturity or upon acceleration thereof)
and such indebtedness is not discharged, or such acceleration is not rescinded
or annulled, within a period of 30 days after notice as provided in the
Indenture; and (f) certain events of bankruptcy, insolvency or reorganization
with respect to the Company or any Significant Subsidiary. Subject to the
provisions of the Indenture relating to the duties of the Trustee in case an
Event of Default shall occur and be continuing, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request or direction of any of the Holders, unless such Holders shall have
offered to the Trustee reasonable indemnity. Subject to such provisions for
the indemnification of the Trustee, the Holders of a majority in aggregate
principal amount of the Outstanding Notes will have the right to direct the
time, method and place of conducting any proceeding for any remedy available
to the Trustee or exercising any trust or power conferred on the Trustee.
If an Event of Default (other than as specified in clause (f) above with
respect to the Company) shall occur and be continuing, either the Trustee or
the Holders of at least 25% in principal amount of the Outstanding Notes may,
subject to the subordination provisions of the Indenture, accelerate the
maturity of all Notes; provided, however, that after such acceleration, but
before a judgment or decree based on acceleration, the Holders of a
30
<PAGE>
majority in aggregate principal amount of Outstanding Notes may, under certain
circumstances, rescind and annul such acceleration if all Events of Default,
other than the non-payment of principal of the Notes which have become due
solely by such declaration of acceleration, have been cured or waived as
provided in the Indenture. If an Event of Default as specified in clause (f)
above occurs and is continuing, then the principal of, and accrued interest
on, all the Notes shall automatically become immediately due and payable
without any declaration or other act on the part of the Holders of the Notes
or the Trustee. For information as to waiver of defaults, see "--Meetings,
Modification and Waiver."
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder
shall have previously given to the Trustee written notice of a continuing
Event of Default and the Holders of at least 25% in aggregate principal amount
of the outstanding Notes shall have made written request, and offered
reasonable indemnity, to the Trustee to institute such Proceeding as trustee,
and the Trustee shall not have received from the Holders of a majority in
aggregate principal amount of the outstanding Notes a direction inconsistent
with such request and shall have failed to institute such proceeding within 60
days. However, such limitations do not apply to a suit instituted by a Holder
of a Note for the enforcement of payment of the principal of, premium, if any,
or interest (including Liquidated Damages) on such Note on or after the
respective due dates expressed in such Note or of the right to convert such
Note in accordance with the Indenture.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
MEETINGS, MODIFICATION AND WAIVER
The Indenture contains provision for convening meetings of the Holders of
Notes to consider matters affecting their interests.
Certain limited modifications of the Indenture may be made without the
necessity of obtaining the consent of the Holders of the Notes. Other
modifications and amendments of the Indenture may be made, and certain past
defaults by the Company may be waived, either (i) with the written consent of
the Holders of not less than a majority in aggregate principal amount of the
Notes at the time outstanding or (ii) by the adoption of a resolution, at a
meeting of Holders of the Notes at which a quorum is present, by the Holders
of at least 66 2/3% in aggregate principal amount of the Notes represented at
such meeting. However, no such modification or amendment may, without the
consent of the Holder of each outstanding Note affected thereby (a) change the
stated maturity of the principal of, or any installment of interest on, any
Note, (b) reduce the principal amount of, or the premium, if any, or interest
on, any Note, (c) reduce the amount payable upon a redemption or mandatory
repurchase, (d) modify the provisions with respect to the repurchase right of
the Holders in a manner adverse to the Holders, (e) change the place or
currency of payment of principal of, premium, if any, or interest on, any Note
(including any payment of Liquidated Damages or of the Repurchase Price in
respect of such Note), (f) impair the right to institute suit for the
enforcement of any payment on or with respect to any Note, (g) modify the
obligation of the Company to maintain an office or agency in New York City,
(h) except as otherwise permitted or contemplated by provisions concerning
consolidation, merger, conveyance, transfer, sale or lease of all or
substantially all of the property and assets of the Company, adversely affect
the right of Holders to convert any of the Notes or to require the Company to
repurchase any Note other than as provided in the Indenture, (i) modify the
subordination provisions in a manner adverse to the Holders of the Notes, (j)
reduce the above-stated percentage of outstanding Notes necessary to modify or
amend the Indenture, (k) reduce the percentage of aggregate principal amount
of outstanding Notes necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults, (l) reduce the
percentage in aggregate principal amount of outstanding Notes required for the
adoption of a resolution or the quorum required at any meeting of Holders of
Notes at which a resolution is adopted, or (m) modify the obligation of the
Company to deliver information required under Rule 144A to permit resales of
Notes and Common Stock issuable upon conversion thereof in the event the
Company ceases to be subject to certain reporting requirements under the
United States securities laws. The quorum at any meeting called to adopt a
resolution will be persons holding or representing a majority in aggregate
principal amount of
31
<PAGE>
the Notes at the time outstanding and, at any reconvened meeting adjourned for
lack of a quorum, 25% of such aggregate principal amount.
The Holders of a majority in aggregate principal amount of the outstanding
Notes may waive compliance by the Company with certain restrictive provisions
of the Indenture by written consent or by the adoption of a resolution at a
meeting. The Holders of a majority in aggregate principal amount of the
outstanding Notes also may waive any past default under the Indenture, except
a default in the payment of principal, premium, if any, or interest, by
written consent.
TITLE
The Company, the Trustee, any Paying Agent and any Conversion Agent may
treat the registered owner (as reflected in the security register) of any Note
as the absolute owner thereof (whether or not such Note shall be overdue) for
the purpose of making payment and for all other purposes.
NOTICES
Notice to Holders of the Notes will be given by mail to the addresses of
such Holders as they appear in the Security Register. Such notices will be
deemed to have been given on the date of such mailing.
Notice of a redemption of Notes will be given at least once not less than 30
nor more than 60 days prior to the redemption date (which notice shall be
irrevocable) and will specify the Redemption Date.
REPLACEMENT OF NOTES
Notes that become mutilated, destroyed, stolen or lost will be replaced by
the Company at the expense of the Holder upon delivery to the Trustee of the
mutilated Notes or evidence of the loss, theft or destruction thereof
satisfactory to the Company and the Trustee. In the case of a lost, stolen or
destroyed Note, indemnity satisfactory to the Trustee and the Company may be
required at the expense of the Holder of such Note before a replacement Note
will be issued.
GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance with
the laws of the State of New York, United States of America.
THE TRUSTEE
In case an event of default shall occur (and shall not be cured), the
trustee will be required to use the degree of care of a prudent person in the
conduct of his own affairs in the exercise of its powers. Subject to such
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the indenture at the request of any of the holders of
notes, unless they shall have offered to the trustee reasonable security or
indemnity.
PLAN OF DISTRIBUTION
This Prospectus relates to the offer and sale from time to time by the
holders of Notes of an aggregate amount of up to $250,000,000 and Shares
issuable upon conversion of such Notes. The Notes were issued in a private
placement, and this Prospectus has been prepared in connection with
registering the Notes and Shares to allow for sales of Notes and Shares by the
applicable Selling Securityholders to the public in accordance with the terms
of the Noteholders Registration Rights Agreement. The Company has registered
these Securities for sale pursuant to the terms of the Noteholders
Registration Rights Agreement, but registration of such Securities does not
necessarily mean that any of such Securities will be offered and sold by the
holders thereof.
32
<PAGE>
All of the Securities offered hereby are offered by the Selling
Securityholders. The Company will not receive any proceeds from the offering
by the Selling Securityholders. The Securities may be sold from time to time
to purchasers directly by any of the Selling Securityholders. Alternatively,
the Selling Securityholders may from time to time offer the Securities through
dealers or agents, who may receive compensation in the form of commissions
from the Selling Securityholders and/or the purchasers of Securities for whom
they may act as agent. The Selling Securityholders and any dealers or agents
that participate in the distribution of Securities may be deemed to be
"underwriters" within the meaning of the Securities Act and any profit on the
sale of Securities by them and any commissions received by any such dealers or
agents might be deemed to be underwriting commissions under the Securities
Act.
At a time a particular offer of Securities is made, a Prospectus Supplement,
if required, will be distributed that will set forth the name and names of any
dealers or agents and any commissions and other terms constituting
compensation from the Selling Securityholders and any other required
information. The Securities may be sold from time to time at varying prices
determined at the time of sale or at negotiated prices.
In order to comply with the securities laws of certain states, if
applicable, the Securities may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the Securities may not be
sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
The Securities may also be sold in one or more of the following
transactions: (a) block transactions (which may involve crosses) in which a
broker-dealer may sell all or a portion of such Securities as agent but may
position and resell all or a portion of the block as principal to facilitate
the transaction; (b) purchases by any such broker-dealer as principal and
resale by such broker-dealer for its own account pursuant to a Prospectus
Supplement; (c) ordinary brokerage transactions and transactions in which any
such broker-dealer solicits purchasers; (d) sales "at the market" to or
through a market maker or into an existing trading market, on an exchange or
otherwise, for such Securities; and (e) sales in other ways not involving
market makers or established trading markets, including direct sales to
purchasers. In effecting sales, broker-dealers engaged by the Selling
Securitiesholders may arrange for other broker-dealers to participate.
EXPERTS
The consolidated financial statements of BEA Systems, Inc. included in the
Company's Annual Report on Form 10-KSB for the year ended January 31, 1998 and
the supplemental consolidated financial statements of BEA Systems, Inc.
included in the Company's current reports on Form 8-K dated September 10, 1998
and Form 8-K/A dated October 29, 1998, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon, included therein
and incorporated herein by reference. Such consolidated financial statements
are incorporated by reference herein in reliance upon such reports given on
the authority of such firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the securities offered pursuant to this
Prospectus will be passed upon for the Company by Morrison & Foerster LLP,
Palo Alto, California. Certain attorneys at Morrison & Foerster LLP own an
aggregate of 34,500 shares of Common Stock of the Company.
33
